Chapter 15 Bankruptcy – Ancillary and Other Cross-Border Cases

Table of Contents

Overview

While not a common bankruptcy type, Chapter 15 bankruptcy allows foreign entities to work with U.S. courts to address debt issues. The United Nations Commission on International Trade Law (UNCITRAL) addresses international bankruptcy issues, and Chapter 15 basically adopts the regulations in the U.S.

When a foreign debtor or other relevant parties file bankruptcy in another country, Chapter 15 provides the foreign debtor with a way to gain access to U.S. Bankruptcy Courts in order to administer assets or take legal action for the debtor in the U.S. A relatively new bankruptcy option, Chapter 15 was added to the U.S. Bankruptcy Code in 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act was passed.

The Chapter 15 Bankruptcy option aims to achieve the following goals:

Increase cooperation between US courts and parties of interest and the courts and authorities of foreign countries involved in cross-border insolvency cases.

Create greater legal certainty for international trade and investment.

Establish and maintain fair and efficient administration of international insolvencies that protect the interests of creditors, debtors, and other interested parties.

Protect and maximize the value of the debtor's assets.

Provide rescue resources for financially troubled businesses, in order to protect investments and preserve employment.

The number of Chapter 15 bankruptcies filed in the U.S. is very small. From 2010 to 2017, there was an average of just 100 Chapter 15 bankruptcies per year in the U.S. This is therefore a rare bankruptcy type, and one that is most often misunderstood. Chapter 15 differs greatly from other types of U.S. bankruptcies in that it always involves foreign entities, and is executed as a secondary process, with proceedings in the home country serving as primary. When a Chapter 15 bankruptcy is filed, the U.S. bankruptcy court is petitioned to recognize the related foreign proceedings by presenting documentation that prove that foreign proceedings are taking place. The petitioner in Chapter 15 cases is a foreign representative.

The U.S. Bankruptcy Court hears the petition and makes a ruling about the foreign proceeding, to decide whether it is “foreign main proceeding” or “foreign non-main proceeding”. “Foreign main proceeding” means that the debtor has its main interests in the country where the proceeding is happening, whereas “foreign non-main proceeding” means that the debtors’ main interests are elsewhere. If the court rules that it is a“foreign main proceeding”, there is anautomatic staythat goes into effect to protect the assets of the foreign debtor that are within the United States. Since those assets are almost always just a fraction of the total financial portfolio of the debtor, U.S. bankruptcy courts frequently defer to foreign courts’ decisions about other aspects of the bankruptcy. The U.S. courts may appoint a trustee to act on behalf of the U.S. assets in foreign courts. The countries involved in this process cooperate and respect one another’s rules and regulations that relate to bankruptcies and debt. However, in some cases, if the U.S. bankruptcy court determines that foreign regulations are not doing enough to protect the parties involved, it may offer additional concessions and help.

Once a U.S. bankruptcy court recognizes a foreign main proceeding, a foreign representative is authorized to operate the debtor’s business in a very similar way as the Chapter 11 structure. He or she can also execute a full-fledged bankruptcy case under any other chapter of the Bankruptcy Code, if the foreign debtor meets all the U.S. eligibility requirements. The foreign representative in a Chapter 15 case can intervene in court proceedings in the U.S. in which the foreign debtor is a party, and it can sue and be sued in the U.S. on the foreign debtor’s behalf. The representative shares a lot of the powers given to a non-foreign bankruptcy trustee under the Bankruptcy Code, with the exception of invalidating pre-bankruptcy preferential or fraudulent asset transfers or obligations.

Qualifying for Chapter 15 Bankruptcy

In order to qualify for Chapter 15 bankruptcy, foreign debtors have to have assets in the U.S., and have to be working with their local government to address their situation. They must have documentation of this to show the U.S. bankruptcy courts. A few recent Chapter 15 filings have included the below entities:

Kraus Carpet Inc. (Canada)

Daiichi Chuo Kisen Kaisha (Japan)

Abengoa SA (Spain)

Deciding to File for Chapter 15 Bankruptcy

The decision to file for Chapter 15 bankruptcy made when a foreign debtor needs to protect its U.S.-based assets or operations. If those assets are at all substantial and important to the business, and if the business can support Chapter 15 costs and accommodate its requirements, it will usually utilize this ancillary option. On the other hand, if the foreign entity in question does not have significant U.S. assets, or is fully accommodated by the proceedings in their home country, it will not have the need to utilize this option. Because all U.S. bankruptcy filings are public record, a company may choose to protect their U.S. reputation by only filing in their home country.

Conclusion

While a rare option, Chapter 15 bankruptcy provides assistance for foreign parties with assets in the U.S. It is the only secondary or ancillary bankruptcy filing in the U.S., and it can provide valuable structure and help for overwhelmed foreign debtors manage their U.S. assets while they navigate primary foreign legal proceedings. Most importantly, it allows the U.S. to stay collaborative and knowledgeable of foreign court regulations and proceedings and to have a role in supporting international businesses conducting business in the U.S.